Trade Talk with Mahmud Abdel Cader/
The Sri Lankan currency crisis and what that means for pulses

Hi Mahmud, thanks for agreeing to talk to us. Can you start by telling us a bit about your company and your experience in Sri Lanka’s pulses market over the years?

Yes, so I started Pulses Splitting and Processing Industry [PSPI] back in 1999. We opened one of the first processing facilities in Sri Lanka, which up until that point was just importing split lentils. But we could see growing demand in the domestic market, so we increased our capacity. 

In the more than two decades we’ve been in operation, I’ve definitely seen the market get more competitive. We started out on our own but now I’d say there are at least 12 other players in the market and the volume is around 145,000 tonnes per annum. And, more recently, the currency crisis we are facing has made conditions in the market much tougher.

Interesting, we will come to the currency crisis in more detail. But could you tell us a bit more about your lentil processing operations?

We specialise in splitting red lentils, primarily from Canada and Australia. We prefer the Australian variety because the product is dryer and it has less moisture, which makes it much easier for us to process those lentils, because our climate also has a lot of moisture. So when we import from Australia, we have much better yields than Canadian lentils.

We sell some of our products into the Sri Lankan market but we also re-export, mostly to southeast Asia and a smaller portion goes to Europe, the U.S. and Australia. 

Great. So, moving on to the currency crisis then - in August and September,  Sri Lanka went through a very serious food crisis, with large price increases and shortages in supply of essential foods, including rice, pulses and cereals. What caused the crisis and what is the situation as we head into 2022?

The main cause of the broader economic disruption is Covid-19. Two of our key sources of earnings were badly affected by the pandemic: tourism and remittances from overseas workers. The lockdown meant that we had almost no foreign visitors. And a lot of overseas workers were forced to return home, as economies around the world shut down. So our economy shrunk by nearly 4 percent last year and the central bank’s reserves shrunk by nearly 75 percent, putting tremendous pressure on our foreign currency.

At the same time, we’re being hit by disruption throughout the global supply chain. Freight prices are very volatile. And with a lack of dollars, it’s hard for us to absorb that uncertainty and pay increased prices. We had a situation recently where there were 1,000 containers full of lentils, sugar, onions, potatoes and other products unable to enter our ports because of a lack of dollars to pay for the goods. Exporters from around the world are also reluctant to ship goods without a confirmed letter of credit, which our local banks cannot provide. So a combination of these factors is feeding through to real price increases for Sri Lankan consumers.

In response to the crisis, the government imposed import restrictions on a number of goods. Can you tell us more about the policy?

Yes, the government implemented a temporary suspension on 682 products. While the list did not include any essential food commodities, there were some products like mung beans and black matpe. The government wants to encourage local growth of these crops to substitute expensive imports.

Interesting. What is the local capacity for growing these crops?

Well, we were importing around 25,000 tonne of black matpe annually and around 12,00 tonnes of mung beans. I don’t think the capacity is there to substitute that kind of volume with domestic production any time soon. I think that it is the right long-term policy goal but it requires programmes in place to support our farmers to make the transition. Unfortunately, that support is not really forthcoming, so I’m not sure how it will work out.

There are also constraints on local production due to a government ban on fertiliser. So all the farmers are trying to work without fertiliser, which is leading to lower yields. 

So thinking about your trading relationships with Canada and Australia, are there any factors which are causing any difficulties?

Overall, we enjoy very positive trading relationships with these countries. We work with about four or five companies in each country. But beyond these relationships, I’d say the biggest difficulty at the moment is probably the challenge of sourcing containers out of the ports at Melbourne and Adelaide in Australia. It can be very unpredictable, so sometimes we get last minute notices of orders and that can be hard to manage when we are trying to ensure consistent supply for our processing facilities.

Any other issues that have cropped up?

Yes, actually, we’ve also seen price increases in Australia recently. We have been importing almost exclusively from there over the last 6 months due to its competitive prices over Canada. But that spread is narrowing. Weather conditions — including serious thunderstorms and rains — affected production, which led to increased prices.

Over the last 12 months, what would you say have been the average prices in Australia and Canada?

Prices in both countries have gone up. But it’s just easier for us to trade with Australia due to proximity. I’d say that earlier this year, we were paying around $585 — $650 per metric tonne from Canada; and between $650 and $700 from Australia. But, in August, that increased to $1,050 in Canada and $1,025 in Australia. In late November, prices in Australia have come down to $900 - $950. 

The big advantage to us for Australian lentils is that they get here much faster (when we can source containers to bring them). It’s 21 days’ transit time from Australia compared with up to 90 days from Canada. So it’s much cheaper and more efficient for us.

And finally, looking out to 2022, what’s the one issue you’re most focused on, as you plan for PSPI?

Well let’s see, I think it has to be the currency issue. That is dominating everything in the market here right now. That’s not something we can control as a private company but what we can do is work closely with the government to keep them up-to-date about developments in the market — locally and internationally — so they can set policies which are advantageous to both businesses and consumers. That means keeping them informed about price fluctuations and other input costs, like international freight.

That’s a very optimistic way of approaching the problem. Thanks so much for your time Mahmud. All the best for the new year!